Companies Act Section 2(76) Related Party

Related Party Section 2 (76)

A Related Party, in relation to a company, refers to individuals or entities that are associated with the company in a manner that may influence or be perceived to influence the company's decisions and transactions. These associations could affect the company's financial performance or governance.

Key Categories of Related Parties:

1. Directors and Key Managerial Personnel (KMP):

Directors (including relatives of directors) and KMPs such as the Managing Director, Chief Executive Officer, Chief Financial Officer, Company Secretary, etc., are considered related parties.

This includes any firm in which a director, manager, or their relatives are partners.

2. Subsidiary, Holding, and Associate Companies:

Subsidiary companies, holding companies, and associate companies (as defined under the Companies Act, 2013) are related parties to each other.

A subsidiary company is one where the holding company controls the composition of the board of directors or exercises control over management policies. 

An associate company is one in which the holding company has significant influence but does not control or jointly controls.

3. Promoters:

Promoters of the company and their relatives are considered related parties. 

Promoters are individuals or entities who have been instrumental in promoting the formation of the company or who exercise control over the company’s affairs.

4. Key Managerial Personnel (KMP):

Key Managerial Personnel, including their relatives and firms in which they are interested, are considered related parties. 

KMPs are senior executives who have significant authority and responsibility in the company's management.

5. Other Companies under Common Control:

Companies under common control, where one entity has the ability to direct policies and management decisions of another entity, are considered related parties.

Transactions with Related Parties:

The Companies Act, 2013 regulates transactions between a company and its related parties to prevent conflicts of interest and ensure transparency. 

Such transactions must be disclosed in the company’s financial statements along with details of the nature, extent, and terms of the transactions.

Disclosure Requirements:

Companies are required to disclose related party transactions in their financial statements, including details of the nature of the transaction, the relationship of the related party, and any other relevant information.

The Audit Committee of the company oversees related party transactions to ensure they are conducted on an arm's length basis and are in the best interests of the company and its shareholders.

Importance:

Governance and Transparency: 

Identifying and disclosing related parties helps ensure transparency in corporate transactions and prevents potential conflicts of interest.  

Investor Protection: 

Disclosure of related party transactions enables investors to assess the impact of these transactions on the company’s financial performance and governance practices.  

Regulatory Compliance: 

Adherence to regulatory norms regarding related party transactions enhances corporate governance standards and regulatory compliance.